CHICAGO -- Despite Gov. George Voinovich's pledge to award state contracts on a competitive basis, an Ohio agency recently used a quasi-negotiated process to select underwriters for a $379.1 million housing issue.
But state officials say the unique selection process made the issue's record-low mortgage interest rate possible. That process had prospective senior managers submitting sealed bids on a prototype of the issue, and then negotiating with state officials for the final management and underwriting fees, takedown, and expenses.
The "competitively negotiated" deal was the first major bond issue to be sold since Gov. Voinovich took office Jan. 14. Despite charges that he had reneged on his campaign promise to do strictly competitive deals, the governor was crowing last week over the single-family mortgage revenue bond deal.
In a press release announcing the results of the bond sale, Gov. Voinovich said the state's housing agency will offer mortgages at a record-low interest rate of 7.625%. This rate also is lower than the interest rate being offered by 11 other states that have sold housing bonds since July 1, according to the press release.
The bonds, which were issued by the Ohio Housing Finance Agency and priced Aug. 13 by a syndicate headed by Lehman Brothers, had interest rates ranging from 5.6% to 7.05%, according to Christy Bixler, chief of communications at the Ohio Department of Development, which includes the housing agency. Goldman, Sachs & Co. was co-senior manager on the deal.
The bond issue was the cause of some political finger pointing after newspaper reports revealed the deal had not been competitively bid.
"We're not making a value judgment on Lehman Brothers or Goldman Sachs, for all we know they may be the best two lead agencies," said Sam Barone, the Ohio Democratic Party's communications director. "Our concerns is only with the process. It was totally an inside deal, and there was nothing bid about it.
"Our entire criticism against the new governor is that he won election based on a pledge to do away with all un-bid contracts," he added. "The fact is what [the administration] is doing is not what they said they would do."
Ms. Bixler acknowledged that while Gov. Voinovich had made that pledge as a candidate, the size of the housing issue prohibited the state from selling the bonds strictly on a competitive basis. Dick Everyhard, executive director of the housing agency, added that the complexity of the deal also led the agency's financial adviser and the firms themselves to recommend against competitive pricing.
One underwriter who worked on the deal said that, despite Gov. Voinovich's earlier comments on the campaign trail, the issue was simply too large and complex to lend itself to competitive bidding.
"It's one thing to speak of something as a candidate," the underwriter said. "Once you get in the seat, it becomes difficult.
"To the extent [the bond issue] did not lend itself to competitive bidding, [state officials] pulled out all the stops to make this process as competitive as possible," the underwriter added. "The state was able to save quite a bit of money by negotiating down the fee."
Ms. Bixler said that if the state does another housing bond issue next year, the agency would use the same financing team, only Goldman Sachs would be the senior manager.
The co-managers were Merrill Lynch & Co.; the Ohio Co.; M.R. Beal & Co.; Donaldson, Lufkin & Jenrette Securities Corp.; Prescott, Ball & Turben Inc.; Pryor, McClendon, Counts & Co.; McDonald & Co. Securities; and John Nuveen & Co.
Mr. Everhart said the process began with a request for proposals that was sent to firms in May. Of the 28 firms that responded, a committee made up of four housing agency board members picked 14 for oral presentations. The number of firms was then reduced to 10, and at that point the sealed bids that had been submitted with the firms' initial written responses were opened, he explained.
Mr. Everhart said the committee had hoped to select Lehman Brothers for the book-running manager due to its expertise in Residual Interest Bonds and Select Auction Variable-Rate Securities, products the firm had pioneered. However, Lehman Brothers came in with the highest bid -- $ 10.89 per bond -- of the six firms vying for the top spot on the deal.
In the meantime, the agency had determined the best cost for the deal was $8.46 per bond. "We asked [Lehman Brothers] to meet our price, and they said they could," Mr. Everhart explained.
He said the use of the RIBs and SAVRs, which made up about two-thirds of the issue, saved 25 to 30 basis points on the mortgage rate.
Officials at some of the firms that participated in the deal said the process was no different than other requests for proposals done by the state in the past.
"As far as I'm concerned it was a [request for proposal]. We responded, and we were chosen," said Jeannette Bradley, a senior vice president at Prescott, Ball & Turben.
Meanwhile, The Columbus Dispatch has reported that lobbyists with connections to the Voinovich administration helped Lehman Brothers and Goldman Sachs land the top spots in the deal.
Charles Henderson, a managing director at Lehman Brothers, declined to comment on the charge. Adam Sherman, a vice president at Goldman Sachs, did not return telephone calls.
But Ms. Bixler contended there was no correlation between which firms were chosen and chich lobbyist represented them.
"All the banking firms involved have lobbyists," she said, adding that those lobbyists "all have friends in the governor's office and the statehouse. But that was inconsequential."
Mr. Everhart added that while he knows the two lobbyists in question, he was not contacted by them.